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Sephaku makes hay while its competitor fumbles

PPC distracted and Sephaku strides forward.

While cement company PPC is distracted by leadership challenges following the surprise resignation of its CEO nearly two weeks ago, smaller rival Sephaku Cement (SepCem) is striding forward.

An operating update released on Wednesday by Sephaku Holdings (SepHold), which owns 36% of the cement maker and 100% of Métier Mixed Concrete, reveals that production and marketing efforts are proceeding as planned.

Métier has completed the construction of its fourth plant in Gauteng, which brings the number of plants it has around the country to 11.

“Métier’s main objective is to achieve relatively high margins through the creation and production of specialised concretes,” says SepHold CEO Lelau Mohuba.

These high value concretes constituted 29% of revenue for the financial year ended 31 March 2014.

Arguably more important is the progress being made with SepCem’s two greenfield operations – one in Delmas, and the second, Aganang, an integrated plant, located in Lichtenburg in the North West.

Last month SepCem’s Delmas plant reached an annualised production capacity utilisation of 80%, which is impressive considering the plant began operating in January.

At Aganang technical issues had delayed commissioning, however, according to the company, these have been resolved. Clinker production began in August and cement production is scheduled for October.

Market demand is also picking up. “The demand for the SepCem brand has increased in both the bulk and retail (bag) markets,” the company says. “The brand’s acceptance is reflected by its delivery to more than 1 000 points in the targeted markets and approximately 500 order related calls per day being handled by the company call centre.”

While the update makes no mention of earnings, one can assume that as the plants are in ramp-up phase they will still be loss making. However this is where the real value and potential in the company lies.

Last year the group made a basic loss per share of R1.49, however a report from Anchor Capital suggests that at current production levels the company is earning profits equivalent to 81c/share.

The commissioning of Aganang is a big plus. Previously SepCem had to acquire raw material from a third party, which drove up costs.

“The internally produced clinker is expected to significantly enhance the cost efficiencies and competitiveness of SepCem,” the update says. “Depending on the production mix, SepCem is expected to achieve a substantial reduction in input costs.”

PPC

Meanwhile the internal dynamics at play at PPC will no doubt be frustrating for shareholders who have endured a meaningful period of share price underperformance.

Under Ketso Gordhan (now former CEO) the struggling business was showing signs of new energy. In its half-year to March PPC’s total cement sales volumes improved by 2% and group revenue was up by 9%. This was on the back of increased export volumes, improved pricing and favourable exchange rates.

In addition, revenues were supported by the consolidation of sales from Safika Cement, which it acquired last December and from Rwandan cement producer CIMERWA, in which it acquired a 51% stake effective January this year.

The timing of Gordhan’s resignation is unfortunate given the aggressive expansion strategy underway in the rest of Africa. In a recent update to shareholders, PPC noted that the construction of its cement plants in Rwanda, the DRC and Ethiopia is progressing well. In Zimbabwe construction is about to begin, while the plant in Rwanda is likely to be commissioned in 2015.

The company also reiterated its commitment to generating 40% of revenue from its businesses outside of South Africa by 2017.

Both companies’ share performance has been constrained by internal and external market-related challenges.

In the case of Sephaku, which has traded down to around R6, the share may now start to move, possibly getting closer to the R7 level it touched in April last year. For the moment, it would appear as if the prospect of a price war in South Africa is a potential concern for investors and this may explain Sephaku’s languishing share price despite its good progress signaled by Wednesday’s operational update.

At PPC much will depend on how the current internal crisis is resolved. The share fell 7% on the news that Gordhan had stepped down, and has fallen a further 3% to R29.20. The latest sell-off follows confirmation on Tuesday from the PIC that it is “in total support” of PPC’s board in light of Gordhan’s resignation. The PIC is one of PPC’s largest shareholders at 12%. “Gordhan’s planned appeal to shareholders at PPC’s next AGM in early 2015 to have the board re-constituted will evidently find little support from the PIC,” said an analyst who can’t be named.

However PPC’s Africa growth strategy presents an opportunity to investors prepared to take advantage of current share price weakness while focusing on the medium-term prospect of PPC as a pan-African cement play. A lower share price compensates for some of the apparent risks involved.

Author: Sasha Planting from Moneyweb

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Founded by Mr Gaopalelwe Olebogeng from the Verdwaal Village in the North West province who is the sole managing member of Bodibeng Trading Proprietary Limited. Mr Gaopalelwe has previous experience in plant cleaning that he acquired during his tenure as a plant cleaner at another cement company in Lichtenburg. Bodibeng Trading Proprietary Limited employs 36 employees from the local community and currently has a short-term contract with SepCem which includes mentorship to ensure that it effectively provides the plant cleaning services at Aganang.

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Mancamane Trading Enterprise

Mancamane is a black female-owned enterprise that started operating in 2010 as a plant cleaning, construction and mining supply company. Ms Daisy Maseko, a renowned entrepreneur, founded the enterprise in the Delmas area, Mpumalanga province and currently employs 28 permanent staff. SepCem adopted Mancamane into the enterprise development programme in 2014. The company is currently supplying plant cleaning services to the Delmas grinding plant and has demonstrated the ability to grow sustainably.

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MM&JK Cleaning Projects Proprietary Limited

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Millicent’s Enterprise

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